RWER issue 54: Mary Mellor
Real-World Economics Review, issue 54
You may read the whole paper here: http://www.paecon.net/PAEReview/issue54/Mellor54.pdf
Could the money system be the basis of a sufficiency economy?
Mary Mellor [Northumbria University< UK]
In Issue 53 of the real-world economics review Richard Smith called for ‘a practical, workable post-capitalist ecological economy, an economy by the people, for the people, that is geared to production for need, not for profit’ (2010:42). He suggests economic theorists should ‘go back to the drawing board’ to re-frame how such an economy would operate. In my book The Future of Money I have explored whether the money system could be a possible mechanism for achieving a socially just, democratically administered, sufficiency economy (2010a). A sufficiency economy would be one oriented to meeting people’s material needs to the minimum necessary to enable a high quality of life for all. My case for advocating the money system is that as a socially constructed intangible economic form it is most immediately amenable to collective social action. As Geoffrey Ingham has argued ‘money…is the most powerful of the social technologies’ (2004: 202). A major proviso is that even radial reform of the money system will not eliminate the private ownership and control of tangible economic resources, a key element of the capitalist economy, but it could provide a stepping stone to radical social change.
Those arguing for an ecologically sustainable economy point to the destructive nature of the capitalist market (Scott Cato 2006). This is mainly in terms of externalities and the drive for growth (Scott Cato 2009). Value is attributed to those activities and resources that can immediately access and generate money. Resources not already in private ownership are treated as free goods, and market prices do not take account of long term damage to the environment. The capitalist financial system also drives growth as the search for profits drives competition and expansion together with the reliance on debt-based bank credit to fund the monetary circuit (Rossi 2007, Parguez & Seccareccia 2000). Ecofeminist political economy adds to the ecological critique by pointing out that much of women’s work and lives is excluded from the money-based economy (Mellor 2010b). The market economy and the public economy both frame their activities in money terms, externalising unpaid community and domestic activities. The real economy in ecological and feminist terms would embrace all aspects of the provisioning conditions for human existence to include unpaid work and environmental resources , damage and resilience.
So why see money as the key to developing a sufficiency economy? It is true that money has had a bad press. Love of it is the root of all evil. It commodifies and alienates human relationships. It is the mechanism of the extraction of profit and capital accumulation. At the same time it is arguably a symbol of social trust in that people honour it in their dealings, and it can be, potentially if not actually, an instrument of social policy. What is even more important is the evidence, particularly in the recent financial crisis, that the only mechanism that stands behind money systems is the state as representing the collective economic resilience of the population. While the state can create and circulate money ex nihilo, it still relies on social trust and acknowledgement of that money to enable it to circulate, its power to tax and the collective activities of the people in accepting that money as a reward for labour.
So why not do away with money?
A range of greens, social transformers and social libertarians have made the case for abolishing or reforming national systems of money (Large 2010 Greco 2009, Bennholdt -Thomsen et al 1999). Feminists have also debated long and hard about whether domestic work should receive a wage and often rejected it as crystallising the inequalities inherent in domestic labour. My case for not rejecting a national (or international) money system is that I do not see how complex societies can operate without a generalised mechanism of valuing human activities and fairly allocating goods, services and resources. This case is enforced by the fact that most examples put forward for how local economies would operate involve either localising the existing market system (e.g. farmers markets, craft fairs, etc.) or building new local economic systems based on some alternative means of accounting. In the later case there needs to be either a prior issue of local tokens (Ithaca Hours, Stroud Pounds, etc.) or a central system of recording the interchange of activities as in a LETS scheme (North 2009). What is notable about such local innovations is that it is the money/accounting system that creates the economic circuit, not the interchange of activities that produces an organic emergence of some form of represented value.
This will come as no surprise to social theorists of money. The most important aspect of money is not that it circulates to enable economic exchange, but that it has to be created and issued. This is often skated over in the conventional discussion of money in market systems. The commodity view of money sees it as emerging out of an original market that is assumed to be based on barter. One commodity is adopted as a medium of exchange to solve the problem of finding suitable mutual exchanges. A valuable, durable, divisible and portable commodity is chosen such as gold or silver. From this ‘metallist’ perspective, money is both natural and neutral. It is natural in that the value of money is assumed to relate back ultimately to the intrinsic value of the commodity, usually based on its scarcity or special qualities. It is neutral because commodity money only represents a prior value as between relative goods.
You may read the whole paper here: http://www.paecon.net/PAEReview/issue54/Mellor54.pdf
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Gerson Lima / Maria Alejandra Madi
Edward Fullbrook and Jamie Morgan
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Maria Alejandra Madi / Jack Reardon
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Real-World Economics Review Blog 
I must say I was suprised to see this article in the Real-Economics Review. There was even reference to money being created ex nihilo (ie. out of nothing ofcourse)…Just imagine the establisment economists saying something like this in public during the Great Financial Crisis! Ofcourse, they are not that stupid!
However, the article is somewhat tame, and obviously does not go as far as my evolving project of Transfinancial Economics…which recognizes the reality that money is electronic data transmitted from one bank account to another. Thus, TFE capitalises (!) on this to create something more akin to 21st century thinking, and technology…
Also, I am in the complex process of writing a book possibly entitled Towards Super Economics; Financial Reform, and Global Justice.
An example of money as a social construct – and of banking without banks (or even the government).
As the idea of ‘money as a social construct’ is often somewhat alien to the concepts in the textbooks which we are, alas, used to, a little example might possibly clarify this VIC (Very Important Concept) which is rightly stressed by Mellor.
On April 6th, 1780, Elizabet Kleyman died. She owned a small shop in the Dutch city of Weert). She left two minors and a husband. This husband remarried quite fast, as was usual in those days. When this men would die before these minors came of age, as was not unusual in those days, the new wife would become their custodian and the minors would have a right to the wealth of their biological mother as soon as they came of age. To ensure their claims, a probate inventory was made. In this probate inventory the value of the possessions of the deceased were listed. We encounter among other things (like dozens and dozens of fashionable cups and fashionable saucers and more fashionable cups and more fashionable saucers, as was usual in those days of early modern consumers):
Activa
Value of the inventory of the shop: 232,645
21 debtors (mainly groceries, but also some small loans) 243,–
Obligations 900,–
Cash 687,10
Passiva
‘Normal creditors’ 24,32
‘Death debts’ (funeral, food and drink for guests etc.) 90,–
Source: http://www.meertens.knaw.nl/boedelbank/zoekvoorwerp.php?treffers=96&offset=90&act=zoek&sort=&sortorder=ASC&max_pagina=10&special=&code=1780%2C1&plaats=Weesp&
Among the 21 creditors were, very probably (according to their names), two Germans and one Jew.
On basis of these data (and these data are quite exemplary for the ‘petty debts’ which can be found in so many of the hundreds of thousands and possibly even millions of surviving probate inventories) I would like to draw attention to the next aspects of money, credit and banking:
1. In the article of Mellor, money is seen as a ‘social construct’. For economists, it is (in my experience) often difficult to understand money as a social construct. The ‘petty debts’ in probate inventories might serve as an example There was quite some cash, but many goods were paid with credit, which served as money. Your creditworthiness was based upon your ‘reputation’, which was (informally) tied to your membership of a certain community: people had to know you – and to trust you at least to an extent. This trust was, of course, also based upon the small scale system of ‘everybody knowing everybody’ which limited the possibility to cheat more than one time. Trust was very, very much a social thing, not only tied to the person but also and even more to ones membership of a group – be it a small village or a neighbourhood in a city (but even then, the people who had obtained loans from Elisabet had to provide ‘pledge’ or ‘surety’ (‘Pfand’, in German), often in the shape of silver utensils. On ‘credit’ as money in pre-industrial Europe (an idea fully consistent with the ideas of the ‘classics’, according to this author) see: Nijboer, H.T. (2007), ‘De fatsoenering van het bestaan. Consumptie in Leeuwarden tijdens de Gouden Eeuw’, Groningen. You were ‘in’ or you were ‘out’. If you were ‘in’, you could obtain credit, if you were ‘out’ you couldn’t. Some of these petty debts were only cleared after many years, of after death. Your own reputation – and therefore you right to credit – was partly based on the amount of your debtors.
2. Of course, this ‘social’ money could only exist if there was some unit of account, in this case the guilder of 20 stuivers. It might however well have been that none of the coins hoarded were guilders. The distinction between unit of account’ and ‘means of payment’ was larger than nowadays – but this only underscores the idea of ‘money as a social construct’. . Also, everybody gave credit to everybody with one large exception: taxes. These invariably had to be paid in cash.
3. Many of the functions which nowadays are restricted to banks where in those days routinely performed by small traders – even the creation of money! Again and again we find that lots of petty debts en credits coincided with considerable amounts of cash. In fact, companies and individuals nowadays still can create money – just think of the ‘special purpose money’ cards which enable people to copy or to buy company lunches or of credit obtained from all kinds of suppliers, like dentists or car dealers. The dentist can sell this credit to a billing company (‘factureringsbureau’, in Dutch) – the credit itself served as payment to the dentist.
This kind of information is well known among economic historians. Economists often seem to be less aware of it – despite the fact that, according to Nijstad, similar ideas can be encountered in the works of the ‘classics’. Banks may be less unavoidable than we are accustomed to believe. In fact, even in our days banks me be less important than we are inclined to think. A colleague of mine just bought the house and 6 hectare plot of her (still living) parents – a transaction partly settled with and ‘advance in kind’ of the heritage. I visit quite some ‘horse businesses’- almost all of these are at least partly financed with ‘family capital’. All companies provide credit to other companies (if the ‘reputation’ of these companies is good enough). This list can easily be extended.
Mary Mellor makes a case to ‘democratize’ money and monetary systems. Maybe that does not only mean that the government should take more responsibility. Maybe it might also mean that individuals, households and non-financial companies will take on (even) more financial activities. A case in point might be pensions. Every month, employees in the Netherlands pay billions of Euros to pension funds to obtain a (rather uncertain) right to a pension. It is possible to envisage a system in which this money is not paid to a pension fund but where (part of) ownership of the money stays with the employee – a kind of savings account. The employee might use his or her own money to finance his or her mortgage. This, of course, carries risks. But what doesn’t? The state of course has to set the rules. But it does not always have to be the state (or the bank) who decides where the money is going.
By the way, Elizabet also owned quite some houses and rooms.
Is this what happens when you put the fox in the henhouse?
Sometimes history surpasses you. Below, I made the suggestion to give ordinary people more property rights to their ‘savings’ in pension funds. Why? Read the next quotes, which I encountered this morning:
A. “The Irish Finance Minister, Brian Lenihan, has announced what he hopes will be a comprehensive and final rescue scheme for Ireland’s banks, whose reckless lending has mortgaged the entire Irish economy. The most reckless of the lenders, Anglo Irish, is to receive a further €6.4bn (£5.5bn) of state aid. An additional €2.7bn (£2.3bn) goes into Irish Nationwide. And the NATIONAL PENSION RESERVE FUND (EMPHASIS ADDED, M.K.) is to inject up to €7.2bn (£6.2bn) into Ireland’s second biggest bank, Allied Irish Banks – which will in effect be nationalised, with the state fund likely to hold more than 80% of its shares.”
B. “MAURICE KEANE who joined the Board (OF ANGLO IRISH, M.K.) on 21 January 2009, is a former Group Chief Executive and a former member of the Court of Directors of Bank of Ireland. He is a Director of DCC plc and Axis Capital Holdings Limited and is ALSO A MEMBER OF THE NATIONAL PENSION RESERVE FUND COMMISSION (EMPHASIS ADDED, M.K.). He is a former Chairman of BUPA Ireland Limited and Bristol & West plc”
Sources:http://www.huizenmarkt-zeepbel.nl/29-09-2010/hervorm-woningmarkt-ten-behoeve-van-vergrijzing/
http://www.angloirishbank.com/About-Us/Company_Directors/
“
Money is just “permission” to do this or that — to have enough or not.
Permission implies an “authority.”
So, it seems to all come down to the “authority’s” agenda. Does it want a civilized world, or an uncivilized one?
I wish the “authority” would just tell the truth and say what they want and rationalize it. If they appear crazy, then get rid of them.
Money is, indeed, “an essential national utility”; protection of our environment is, indeed, crucial for our survival; social solidarity and some basic standard of equality are essential to the progress and health of any society – but still, social ideology cannot totally replace economic principles, and expressions like ‘democratic control’ tell very little about the reform proposed by Prof. Mellor.
“Women’s unpaid work”
Mellor complains that the current system does not take account of, inter alia, women’s unpaid work (presumably at home), but why go that far, when the whole production process, even in its most socially advanced forms, is, and always was, partially based on unpaid labour?
This was noted already by J. S. Mill: “If a capitalist supplies a party of labourers with these things, on condition of receiving all they produce, they will, in addition to reproducing their own necessaries and instruments, have a portion of their time remaining, to work for the capitalist”. It is 1848 and nothing changed since then (“unpaid labour” is Marx’ expression — “There is not one single atom of [the additional capital] value that does not owe its existence to unpaid labour” – but no credit given to Mill).
The subject matter is the costless surplus with which the capitalist can do whatever he pleases: spend it, as Mill says, “in necessaries or pleasures, or from which by further saving he can add to his wealth”; spend it on a Caribbean cruise, or on additional labour for the purpose of developing means with which a greater surplus can be gained.
Now, taking a cruise is the capitalist’s own private matter, but further employing labourers and paying them with a costless surplus (produced, as Marx says, by previously employed labour) – this is, apparently, the quintessence of exploitation. Or is it?
“2% of the US labour force is needed to produce all necessary food and exports”
Mellor quotes Stiglitz as, perhaps, a proof of the feasibility of the ‘sufficiency economy’, but this feat was possible due to two factors: first, capitalists employing part of their surpluses for developing and producing new/better means of production, and secondly, the helping hand and pocket of governments.
In fact, Mill’s and Marx’s costless surplus, if productively employed, is the conditio sine qua non of improving the general standard of living – however capital is owned. This is how less and less people can supply increasing quantities of, say, food, letting others supply more and more services, for example.
In a Marxian style economy, this condition would manifest itself by assigning production targets and allocating part of the current power of consumption to the capital-goods producing workforce. In other words, what is defined by Mill as a privately owned ‘surplus’ and ‘saving’, would appear there as purchasing power administratively allocated for the purpose of wealth creation: the Marxian farmers, millers and bakers (bread producers) would be told what part of their produce must be allocated for providing bread to the people engaged in tractor, elevators, flour mills and oven production, as well as in improving the quality of bread itself.
In ‘market economies’ this is accomplishable via the costless business surpluses privately owned, as well as the legislative and taxation power of the State, by the means of which, power of consumption is transferred from taxpayers to the workforce engaged in creating, preserving and increasing the collective wealth and wellbeing through, e.g., public services, infrastructure, public facilities, education, healthcare, supporting R&D, etc.
Moreover, for Mill, the business surplus is the only source of capital formation. He did not attach much importance to household saving, since Households “save at one period of life what they purpose to consume at another”, and as it becomes painfully clear now, the ‘one period’ for some (the period of saving) is the one and the same ‘other period’ for others (the period of consumption): today, and more so in the coming decades, retiring people loaded with claims on money, i.e., financial assets, would expect current savers to pay for their faithfully earned period of consumption (probably, the manipulation of, and dependence on, financial assets, is becoming totally redundant by the introduction of the ingenious Notional Defined Contribution pension plan). However, 20th Century’s experience provides, I believe, ample proof that Mill’s privately owned surplus, is socially less harmful, and economically much more beneficial, than the publicly owned Marxian surplus.
The question that should be asked in the context of any progressive reform, is not what to do with the money system (no doubt about the urgent need of public control and regulation, irrespective of any other reform), but how a privately owned surplus — which is, as Mill taught us, the product of labour — should be entwined with what Mellor calls ‘public action’.
Since Mellor’s reform does allow privately owned profit seeking firms, should their surpluses be ‘democratically controlled’, i.e., should investment decisions reflect what ‘citizens socially determine’?
“Goods and services that citizens socially determine”
No explanation is given by Mellor as to what “democratic control” of the money system means – that is, in comparison with the current state of affairs, say, in Continental Europe or the UK. Does it mean that parliament itself (i.e., the political coalition of the day) should run the money system, instead of statutory bodies?
But money matters, to which Mellor dedicates the best part of her article, will be practically derived from her bold idea that firms will provide “goods and services that citizens socially determine”. The word ‘socially’ is most commendable, but it means very little unless legislative provisions are indicated. It looks, however, as if parliament, or lawfully authorised citizens’ committees, will have the power to instruct firms what to produce, and by implication, at what price.
These two cardinal regime-change measures, proposed by Mellor, are nothing less than revolutionary. No one should be frightened or deterred by thought enriching ideas (for some, mostly in the US, public healthcare system, for example, is evil incarnate), but intellectual integrity would warrant a full disclosure, as it were, of the implied measures.
Mellor’s “public action” undoubtedly implies more active role for government, but however dressed, it implies a stronger government, or just the same, delegated functions to ‘social’ bodies. Nothing wrong with stronger government, particularly on the regulative side, but readers would have been better rewarded had Mellor dedicated most of her article to the regime-change elements (necessitated by her ideas on social justice and production regime) than to money.
Contemporary government is institutionalised government, in which representative institutions (parliaments) function alongside statutory bodies (courts, civil service, state comptroller, monetary authority, regulators, etc). You are welcome to define it as ‘Democracy’, provided the underlying concept and structure are clearly understood. However, it is this historically hard-won structure that enables governments to function authoritatively, on the one hand, and enhance and protect human and (to some extent) social rights, on the other hand.
In view of the 20th Century political experience and experimentations, any reform should be pursued and implemented within this delicate structure. After all, this is the heart of the European civil culture.
Mary Mellor says “The most important aspect of money is not that it circulates to enable economic exchange, but that it has to be created and issued. … While the shift from barter to gold/silver, to paper representation is still told, the commodity theory of money has been extensively challenged. … The opposing view is a social theory of money. … . However in historical terms the banking and accounting functions are thousands of years older than coinage.”
So need money circulate? Cannot money be generated automatically by “standing order”, and issued as needed (as happens with my pension), as against specific decision (as when lending the price of a house)? Whereas gold/silver still is barter, paper/electronic money is information (potentially deceitful). It seems paper money can still be recirculated (e.g. by bankers and thieves), whereas my own electronic credit is written off (“used”) when I buy something, and reissued as an entry in the trader’s account. Can money be a commodity unless it can be so “used”? Can it be used safely if all transactions with it are not accounted for? Can it be accounted for if its cyclic changes of form (i.e. from credit to investment to share entitlements to actual assets to resale value) are not all accounted for? Can you run a shop without saying what your prices refer to? Who was Robert Searle really calling stupid about the fact of “ex nihilo” creation of money?
I have to say, Robert, I thought this paper nicely understated rather than tame.
Re Zuriel Shiv’s significant critique, a resolution that has perhaps not yet been noticed is that “authority” involves knowing what you are talking about, not militarised policing and/or financial blackmail of government. In a genuine democracy, central government can be in a position to advise norms even where (except in emergency) it should not dictate: particularly to local levels of government, who are in the same position with more specific knowledge. It might well advise us on time-sharing and mass-production in order to provide local resources and leave everyone time to contribute to community maintenance and competitive arts, crafts, scientific and development activities, but its principle should be “management by exception”: only if something goes wrong should not taking advice be held against you. Barack Obama made an interesting comment about the US constitution: he had found the discussions about why its principles had been decided on more helpful than the principles themselves.
A similar principle holds with local currencies as holds with local government. A local currency (i.e. credit issued at a given level) should have priority at its own level of locality and be acceptable at lower levels. Credit for trading at higher levels needs increasingly to be deliberated and advised on by and between governments, leaving traders (rather than governments representing their customers) responsible for balancing their own imports with exports. As for firms seeking “profit” in the sense of importing more monetary credit than their work justifies, the resolution of that is to put any “surplus” in a prize fund, making quality, generosity and endevour the deciding factors in who we choose to profit.
To DT,
I was not saying that the idea of banks creating money out of thin air (ie. ex nihilo) as a loan to society was stupid. Au contraire! If they were unable to do that we would not enjoy the level of wealth in society.
What I was basically saying in my last post is actually simple. What if during the “height” of the Great Financial Crisis establisment economists claimed that banks created money ex nihilo electronically? It could potentially cause a bit of a panic in society. People would arguably question whether banking is somekind of legalised fraud…..! So, obviously establishment economists would not bedumb to go down that route, and ofcoure it would have little, or no practical implications unless it were part of somekind of advanced plan (eg. my evolving project of Transfinancial Economics).
I would like to add here that sometime ago I went to a talk held by Vince Cable who was promoting his book. During the Q&A session I revealed that most of the money of the world is created as credit with interest by private commercial banks. The government only creates a new non-existent portion of the money supply but as something which is non-repayable. Cable claimed that I was “broadly right” to use his words. He even went on to try, and attempt to explain fractional reserve banking, or creadit creation though he did not use the words ex nihilo, or out of thin air ofcourse. Many textbooks describe the process as if it were something normal, and natural without really grasping the full implications of it…
ERRATA.
Last paragraph “The government only creates a new non-existent portion… ” should read “The government only creates a near non-existent portion… ” The government ofcourse creates it as paper, and coins as opposted to electronic creation notably undertaken by banks.
A problem not discussed in this paper is that under central banking law in the U.K. and the U.S.A., just to point to two prominent examples, government is empowed to self-create credit. This is accomplished when the central bank creates new monetary balances deposited to the account of the Exchecquer or Treasury Department. The nation’s money supply is increased without any increase in the production of goods or services. A commodity-backed currency system would have the virtue of eliminating this inflationary power. One economist in the United States has made the case for use of construction bricks as the commodity to back currency rather than precious metals. Bricks can be readily manufactured, have a very long life, are easily replaced if destroyed and have a strong demand as a commodity.
Belatedly, Robert (for which apologies), I was not suggesting the IDEA of creating money out of nothing was stupid, and I agree it is not. I asked “WHO did you think was stupid”? If not the bankers (and only on a very secular interpretation of “self-interest” is it not), then I suggest it is US, and especially our political representatives, to accept their charging interest on nothing and profiting from lending it wholesale to enable speculators to inflate bubbles with it. Your satire was appreciated, but really, the situation is not funny.
If you are writing a book about this, look closely at what I wrote above (and also in response to Lars Syll in PAER 54), because the Copernican revolution occurred not by disputing facts like creation of money ex nihilo, but by inverting what appears to be obvious: there, that the sun goes round the earth, here that bankers and authorities are trustworthy and the rest of us are not. Huh!
I think, therefore, that Leibniz is on the right track, but Edward, while currencies should not (as now) be backed by fictitious (i.e. speculative) property valuations, a commodity backing has the same problems as the Gold Standard. A currency ultimately has to be backed by trust, not “in what?” but “in whom?”
My response in brief. I am sorry if I mistook what was implied. I think you could easily argue that the US (ie. the government) is responsible for the crisis at large due to a lack of good credible regulation of the financial sector.
That money is created ex nihilo is not obvious to everyone except for the likes of us. It has moral implications which are never properly touched upon by mainstream economics. And ofcourse we have money which is not backed by anything other than trust as you pointed out.
i like Mary Mellor’s short paper very much. she contributes an important perspective and much to consider. my criticism is only that the paper is very dense, very terse and could use considerable expansion. the ideas at first pass look promising, but need much unpacking to carry the force of persuasion.
may i suggest several other factors which could contribute to a stable, honest sufficiency monetary system:
1. original govt issued “money” should be in the form of demurrage currency, so that it carries a known/stated time based devaluation, (say one half percent per month), and thus cannot be hoarded but must be spent and circulated. but it can be used to “save” through deposit in highly regulated institutions for designated purposes (retirement, building fund, education, medical, etc.), and “paid out” by direct transfer to the operating accounts of those service providers.
2. the “money” must carry a “tale” or a “tail” which is a fully transparent record of transfer, so that it cannot be spent or transferred further except by the current “owner” of record. this could by easily accomplished with digital currency, and also now, with embeddable memory chips, in a paper or plastic physical form, which could look much like today’s paper money. this would stop a great deal of crime and swindling, as money itself would be fully trackable/traceable. it would not stop the exchange of “diamonds” etc, for drugs, or other kinds of criminal exchanges, but it would make them much more difficult to hide. and money which carries a tail, provides its own accounting system to assist in understanding what is really happening in the on-the-ground hand-to-hand economy–much of which is now hidden. Yes, this would end money secrecy, but certainly not other kinds of private exchanges. it would be an enormous help in ending the large criminal flows, such as the hundreds of billions of government tax/money “lost” and unaccounted for during the Paul Bremer regime (CPA) during the early occupation of Iraq in 2003-4, and the trillions of “lost” property and cash which the US department of Defense cannot find or explain, and it would end the offshore criminal banking. Money with a tail/tale will stop much of the corruption and criminal laundering by bankers and government officials, as currently practiced.